Question
Security i E(Ri) bi1 bi2 A 6.6% 0.2 -0.1 B 12.75% 0.3 0.5 C 9.9% -0.2 0.6 a. What is the equation of the APT?
Security i | E(Ri) | bi1 | bi2 |
A | 6.6% | 0.2 | -0.1 |
B | 12.75% | 0.3 | 0.5 |
C | 9.9% | -0.2 | 0.6 |
a. What is the equation of the APT? (0.06, 0.075, 0.09)
b. What is the expected return on a portfolio of B and C with zero sensitivity to factor 1?
c. Suppose there is a security, D, with sensitivity of zero to factor 1, and 0.2 to factor 2, and expected return of 9.675%, will you buy it? Why?
d. An investor believes that the expected returns above (table) come from the CAPM instead of the APT but agrees with the risk-free rate estimated above. The analyst uses a security B to demonstrate his point. What is his estimate of the market portfolio assuming the beta of B is 0.8?
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